Is Kelsian Group Limited's (ASX:KLS) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Kelsian Group (ASX:KLS) has had a great run on the share market with its stock up by a significant 55% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Kelsian Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kelsian Group is:

6.4% = AU$62m ÷ AU$958m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.06.

View our latest analysis for Kelsian Group

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Kelsian Group's Earnings Growth And 6.4% ROE

At first glance, Kelsian Group's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. Looking at Kelsian Group's exceptional 32% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Kelsian Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 29% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Kelsian Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kelsian Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 89% (implying that it keeps only 11% of profits) for Kelsian Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Kelsian Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 58% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 8.1%, over the same period.

Conclusion

In total, it does look like Kelsian Group has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.